January 21, 2016

The failure of a mortgagee to file a claim in the probate of an estate does not bar the mortgagee from later pursuing a foreclosure, the U. S. Court of Appeals for the First Circuit recently held.

The plaintiff inherited a house from his mother's estate. The property was subject to a reverse mortgage, which contained an acceleration clause and power of sale, and became due and payable upon the mother's death. The estate was administered and closed without the holder of the reverse mortgage asserting any claim against the estate. Following the close of probate, the mortgagee instituted foreclosure proceedings against the property. The plaintiff filed suit, challenging the mortgage and the foreclosure as invalid based on the mortgagee's failure to file a claim in the probate proceedings.

The Court considered whether probate proceedings extinguish a real estate mortgage and the accompanying right to foreclose. In reaching its decision, the Court found a compelling analogy in the realm of bankruptcy law, which provides that a creditor may recover the deficiency on a mortgage loan through an action against in the debtor in rem despite the debtor's discharge in bankruptcy.

The Court also cited authority from the U.S. Supreme Court noting a lender's right to foreclose on a mortgage can be viewed as an equitable remedy for the debtor's default on payment of the underlying debt. Thus, the Court reasoned the right to foreclose on a mortgage should be treated as separate and distinct from the right to collect on the underlying debt. The Court found that while the failure to file a claim in a probate proceeding may extinguish the personal liability on the note secured by the mortgage, the same failure does not extinguish the mortgage itself. Therefore, the Court held the failure to file a claim on the debt in probate proceedings would not interfere with the right of a mortgagee holding a reverse mortgage to proceed against the real property that secures the debt.

The Consumer Financial Protection Bureau (CFPB) has issued a "fact sheet" regarding the disclosure of construction-to-permanent loans under the TILA/RESPA Integrated Disclosure (TRID) rule, which the CFPB refers to as the Know Before You Owe rule. The fact sheet falls far short of the detailed guidance sought by the mortgage industry.

A construction-to-permanent loan is a single loan that has an initial construction phase while the home is being built, and then a permanent phase for when construction is complete and standard amortizing payments begin. Although, as noted below, the TRID rule does address such loans, the rule does not provide detailed guidance on how to complete the Loan Estimate and Closing Disclosure for such loans, nor are sample disclosures included with the TRID rule.

In the fact sheet, the CFPB notes that Regulation Z section 1026.17(c)(6)(ii) and Appendix D to Regulation Z continue to apply in the new TRID rule world, and the CFPB specifically notes that they apply to the Loan Estimate and Closing Disclosure. The cited section provides that when a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction. The fact sheet indicates, as the CFPB staff had informally advised in a May 2015 webinar, that a construction-to-permanent loan may be disclosed in a single Loan Estimate and single Closing Disclosure, or the construction phase and permanent phase can be disclosed separately, with the construction phase being set forth in one Loan Estimate and Closing Disclosure and the permanent phase being set forth in another Loan Estimate and Closing Disclosure.

Appendix D provides guidance on how to compute the amount financed, APR and finance charge for a multiple advance construction loan, when disclosed either as a single transaction or as separate transactions. The TRID rule added a commentary provision regarding Appendix D to address the disclosure of principal and interest payments in the Projected Payments sections of both the Loan Estimate and Closing Disclosure. The commentary provision does not address other elements of the Projected Payments sections. Additionally, the CFPB does not clarify in the fact sheet that Appendix D applies only when the actual timing and/or amount of the multiple advances are not known.

Likely realizing that this guidance would fall short of the detailed guidance and sample disclosures sought by the industry, the CFPB's final statement in the fact sheet is "The Bureau is considering additional guidance to facilitate compliance with the Know Before You Owe mortgage disclosure rule, including possibly a webinar on construction loan disclosures."

The industry needs and deserves more than a webinar. It deserves detailed written guidance with sample disclosures. The failure of the CFPB to provide written guidance on other aspects of the TRID rule has significantly contributed to the confusion and uncertainty in the industry regarding TRID rule requirements. It is frustrating to the industry that the CFPB continues to resist providing written guidance on TRID rule matters (as well as other matters), particularly when its sister federal agencies regularly provide written guidance on important matters.

Freddie Mac's Primary Mortgage Market Survey (PMMS) no longer provides regional breakouts for the 15-year and 30-year fixed-rate mortgages, or the 5/1 hybrid ARM. Every week, lenders throughout the country are surveyed on the rates, fees, and points for certain mortgage products.

The elimination of the regional breakouts had caused uncertainty for lenders in New York since the subprime calculation is pegged to the Freddie Mac Northeast Regional PMMS. Under Section 6-M of the New York Banking Law, a subprime loan, if insured by the FHA, means "an initial interest rate or the fully indexed rate, whichever is higher, on the loan exceeds by more than two-and-a-half percentage points for a first lien loan, or by more than four-and-a-half percentage points for a subordinate lien loan," the average commitment rate as published by the Freddie Mac Regional PMMS in the week prior to the week in which the loan estimate is provided.

DFS issued guidance clarifying Section 6-M in light of Freddie Mac's changes on January 20, 2016. Specifically, the DFS promulgated that the Freddie Mac PMMS average rate for loans throughout the United States would constitute the new threshold for determining whether a loan is subprime.

A new Federal Trade Commission (FTC) report, "Big Data: A Tool for Inclusion or Exclusion? Understanding the Issues," warns that certain uses of big data consisting of consumer information may implicate various federal consumer protection laws. The report, which is intended "to educate businesses on important laws and research that are relevant to big data analytics and provide suggestions aimed at maximizing the benefits and minimizing its risks," focuses on big data's impact on low-income and underserved populations and protected groups. The FTC puts companies on notice that it intends "to monitor areas where big data practices could violate existing laws" and "bring enforcement actions where appropriate."

The report discusses the potential applicability of the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), and the FTC Act to big data practices and provides a list of "questions for legal compliance" for companies to consider in light of these laws. Highlights of the FTC's discussion include the following:

FCRA. The FCRA imposes various obligations on consumer reporting agencies (CRAs) that compile and sell reports containing "consumer information that is used or expected to be used for credit, employment, insurance, housing or similar decisions about consumers' eligibility for certain benefits and transactions" and users of consumer reports. The report identifies "a growing trend in big data, in which companies may be purchasing predictive analytics products for eligibility determinations." For example, instead of using a traditional credit scoring variable such as a consumer's payment history, "these products may use non-traditional characteristics—such as a consumer's ZIP code, social media usage, or shopping history—to create a report about the creditworthiness of consumers that share those non-traditional characteristics," which a company can then use to make creditworthiness decisions. The report cautions that, in an enforcement action, the FTC applies the same standards to determine the FCRA's applicability to such use of non-traditional characteristics as it applies to the use of more traditional characteristics.

The report includes examples of FTC enforcement actions against data brokers that compiled data and provided it to companies to use for FCRA-covered eligibility decisions, as well as against companies that used big data for eligibility decisions without making FCRA-required disclosures. Such examples include the FTC's 2012 action against online data broker Spokeo which, according to the FTC's complaint, allegedly assembled and merged personal information from hundreds of data sources, including social networks, to create detailed personal profiles that included hobbies, ethnicity, and religion, and marketed those profiles for use by human resources departments in making hiring decisions. Based on its allegation that Spokeo marketed the profiles specifically for employment purposes, the FTC determined that Spokeo was subject to, but had not complied with, the FCRA. The FTC's message is that companies whose practices involve big data analytics, such as an analysis of online behavioral data, should be mindful of the scope of the FCRA's CRA definition and the compliance obligations that the FCRA imposes upon CRAs, and that users of reports provided by such companies should also be mindful of their FCRA compliance obligations.

ECOA. The report cautions companies using big data to consider the impact of the ECOA and other federal equal opportunity laws, including the Fair Housing Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the Genetic Information Nondiscrimination Act. With regard to the ECOA, which prohibits discrimination on a prohibited basis in connection with any aspect of a credit transaction, the report advises companies to "proceed with caution" in the area of credit advertisements. In particular, the report observes that ECOA/Regulation B compliance considerations may arise with respect to the prohibition against discouraging credit applications on a prohibited basis and record retention requirements relating to prescreened solicitations. It also warns that "[a]dvertising and marketing practices could impact a creditor's subsequent lending patterns and the terms and conditions of the credit received by borrowers, even if credit offers are open to all who apply." The ECOA takeaway is that "companies should proceed with caution when their practices could result in disparate treatment or have a demonstrable disparate impact based on protected characteristics."

FTC Act. Uses of big data may run afoul of Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices. An act or practice is deceptive if it involves a misrepresentation or omission that is likely to mislead a consumer acting reasonably under the circumstances. As an example, the FTC cites its 2008 enforcement action against CompuCredit alleging that the company violated Section 5 by failing to disclose that consumers' credit lines would be reduced if they used their credit cards for cash advances or for certain types of transactions, including marriage counseling, or at bars and nightclubs. Observing that a failure to reasonably secure consumers' data can be a potentially unfair practice where the failure is likely to cause substantial injury, the FTC cautions "[c]ompanies that maintain big data on consumers [to] take care to reasonably secure that data commensurate with the amount and sensitivity of the data at issue, the size and complexity of the company's operations, and the cost of available security measures."

We note that a 2014 Northeastern University study confirmed that many companies are already using big data to engage in price steering and price discrimination. This study reported that consumer characteristics, such as a consumer's browser or device type or a consumer's purchase or viewing history, would lead to "personalization" of prices.

The report also includes a discussion of special policy considerations raised by big data research, some of which has focused on how big data analytics could negatively affect low-income and underserved populations. The FTC observes that "[n]umerous researchers and commenters discuss how big data could be used in the future to the disadvantage of low-income and underserved communities and adversely affect consumers on the basis of legally protected characteristics in hiring, housing, lending, and other processes." To "maximize the benefits [of big data] and limit the harms," the FTC advises a company to consider the following questions raised by the research: whether the company's data set is sufficiently representative of different populations; data model accounts for biases, predictions based on big data are accurate; and reliance on big data raises ethical or fairness concerns.

Given the FTC's plans to monitor big data practices and bring enforcement actions where appropriate, companies are well-advised to consult with legal counsel to ensure that their big data practices are compliant with consumer protection laws.

CFPB attorney Elena Babinecz, spoke as part of a panel relating to the revised HMDA rule at the Winter Meeting of the Consumer Financial Services Committee of the Business Law Section of the American Bar Association on January 11, 2016. Ms. Babinecz confirmed that the CFPB is engaged in a follow-up policymaking process to allow the public to provide input on privacy concerns relating to new data that those subject to HMDA's reporting requirements are required to collect, record, and report.

As we have previously reported, the new HMDA rule includes numerous new data points. For example, Covered Institutions will be required to collect, record, and report information about applicants and borrowers, including age, credit score, and debt-to-income ratios. Moreover, for data collected in or after 2018, the new rule will require a Covered Institution to allow applicants to self-identify ethnicity or race using disaggregated ethnic and racial subcategories, which information will be reported accordingly.

Ms. Babinecz acknowledged that the CFPB received comments on the rule drawing attention to the fact that many of these new data points implicate important privacy rights. We agree that privacy is a critical issue, and join those who have raised concerns about expansion of data points under the new rule. For example, the new rule will require Covered Institutions to collect and record sensitive information about individuals, which will be accompanied by additional data security burdens.

The CFPB has not provided details on how it intends to ensure that the sensitive information about consumers that will be reported to, and maintained by, the CFPB will be protected from unauthorized access or disclosure. Finally, while the public will be able to obtain HMDA data using the new Internet-based tool being built by the CFPB, what portion of the reported data will be made publicly available is still under consideration by the CFPB.

We look forward to learning more about the CFPB's policymaking relating to data privacy under the new HMDA rule.

The CFPB has issued a request for information (RFI) seeking information on what changes to the CFPB's HMDA Resubmissions Guidelines may be appropriate. The RFI responds to comments received by the CFPB in connection with its final HMDA rule issued in October 2015 that it consider changes to the Resubmission Guidelines to reflect the expanded data to be collected under the final rule.

The RFI contains 12 principal questions to which commenters are asked to respond. (Each principal question is supplemented by one or more follow-up questions.) The questions include:

Whether the CFPB should continue to use error percentage thresholds to determine the need for data resubmission

Whether the error percentage thresholds, if retained, should

Be calculated differently

Continue to include separate thresholds for the entire HMDA loan/application register (LAR) sample and individual data fields within the LAR sample

Include different thresholds for institutions with different LAR sizes and for different HMDA fields based on LAR size

Whether the CFPB should separately survey a financial institution's internal data for HMDA-reportable transactions that were omitted from the institution's LAR

Whether the CFPB should require correction and resubmission for some kinds of errors and, for other kinds of errors, should require only that an institution ensure the errors will not be found in future HMDA submissions

Whether changes are needed in how the CFPB conducts HMDA data integrity reviews, including how it selects HMDA samples for such reviews

The CFPB states in the RFI that it anticipates it will not separately propose and solicit comments on changes to its Resubmission Guidelines before finalizing and publishing changes. In short, this may be the industry's only chance to submit comments on revisions to the Resubmission Guidelines. Comments on the RFI will be due on or before 60 days after it is published in the Federal Register.

The U.S. Supreme Court has ruled that an unaccepted Rule 68 settlement offer does not moot a class action even when the offer would provide the named plaintiff with complete individual relief. The decision in Campbell-Ewald Co. v. Gomez rested on the narrow ground that an unaccepted contract offer has no legal force. It did not address any of the broader constitutional and policy issues on which lower courts had disagreed.

In Campbell-Ewald, the defendant was sued in a class action under the Telephone Consumer Protection Act (TCPA). Before the deadline for filing a motion for class certification, the defendant made an offer of judgment pursuant to Federal Rule of Civil Procedure 68 that would have given the named plaintiff all statutory damages and costs available under the TCPA, but no admission of liability or award of attorneys' fees. The offer was not accepted by the plaintiff, who instead allowed it to lapse. The defendant then moved to dismiss the case for lack of Article III jurisdiction, arguing that the plaintiff's individual claim was mooted by the offer of complete relief. Both the District Court and the Ninth Circuit held that the plaintiff's claim was not moot, reasoning that an unaccepted settlement offer cannot moot either individual or class claims.

Agreeing with the Ninth Circuit, the Supreme Court held that because the plaintiff's claim was not mooted by the petitioner's unaccepted Rule 68 offer, the district court retained Article III jurisdiction to adjudicate the class action complaint. According to the Court, "[u]nder basic principles of contract law," without the plaintiff's acceptance, the petitioner's settlement offer "remained only a proposal, binding neither Campbell nor Gomez." It observed that having "rejected" the offer and "given Campbell's continued denial of liability," the plaintiff "gained no entitlement" to the relief offered. Thus, the Court concluded that because "no settlement offer [was] still operative, the parties remained adverse; both retained the same stake in the litigation they had at the outset." It noted, however, that it was reserving for "a case in which it is not hypothetical," whether the result would differ "if a defendant deposits the full amount of the plaintiff's individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount."

Chief Justice Roberts, in a dissenting opinion joined by Justices Scalia and Alito, wrote that although the majority correctly found an unaccepted settlement offer to be a "legal nullity" as a matter of contract law, the operative question "is not whether there is a contract; it is whether there is a case or controversy under Article III." In the dissenters' view, there is no longer a case or controversy for a court to adjudicate "[i]f the defendant is willing to give the plaintiff everything he asks for." However, the dissenters deemed it "good news" that the Court did not hold that payment of complete relief was also insufficient to moot a case. In a separate dissenting opinion, Justice Alito wrote that the decision "does not prevent a defendant who actually pays complete relief—either directly to the plaintiff or to a trusted intermediary—from seeking dismissal on mootness grounds."

NMLS Release 2016.1

NMLS Release 2016.1 is targeted for January 25, 2016. The release includes functionality for surety companies and surety bond producers to request an account within NMLS and establish business associations, enhancements to the Mortgage Call Report, general system maintenance updates, and an update to the Transunion Rental Screening Solutions, Inc. (TURSS) agreement. A summary of the changes can be found here.

The Connecticut Department of Banking has issued a memorandum to all debt adjuster and money transmission applicants and licensees requiring licensure for persons engaged in activities that meet the definition of both "debt adjustment" and "money transmission" unless exempt. This requirement will be effective on March 1, 2016.

The Department recognizes that some activities such as transmitting bi-weekly mortgage payments to a mortgagee or transmitting unsecured consumer debt payments to a credit are considered "debt adjustment" and "money transmission." More specifically, the Department is requiring that persons considered to be money transmitters by FinCen—those who receive, on behalf of a debtor, money, or evidences thereof for the purposes of distributing such money or evidences thereof among creditors as payment of the debtor's obligations—to become licensed as both unless otherwise exempt.

Connecticut law defines "debt adjustment" as an activity "for or with the expectation of a fee, commission or other valuable consideration, receiving, as agent of a debtor, money or evidence thereof for the purpose of distributing such money or evidences thereof among creditors in full or partial payment of obligations of the debtor." "Money transmission" means "receiving money or monetary value for current or future transmission or the business of transmitting money or monetary value within the United States or to locations outside the United States by any and all means including, but not limited to, payment instrument, wire, facsimile or electronic transfer."

New Jersey has enacted provisions making it unlawful for any person to prepare a report for use by a mortgage lender in evaluating the capacity of an escrow agent to perform real estate settlement services in return for a fee charged to that escrow agent. "Escrow agent" means an independent person, including an independent bonded escrow company, an independent financial institution whose accounts are insured by a governmental agency or instrumentality, an independent licensed title insurance agent, or an attorney licensed to practice law in New Jersey, who is responsible for the receipt of any written instrument, money, evidence of title to real or personal property, or other thing of value to be held until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered in connection with the transfer of real estate.

These provisions are effective immediately.

- Wendy Tran

Did you know?

NMLS Release 2016.1

by Wendy Tran

NMLS Release 2016.1 is targeted for January 25, 2016. The release includes functionality for surety companies and surety bond producers to request an account within NMLS and establish business associations, enhancements to the Mortgage Call Report, general system maintenance updates, and an update to the Transunion Rental Screening Solutions, Inc. (TURSS) agreement. A summary of the changes can be found here.

The Connecticut Department of Banking has issued a memorandum to all debt adjuster and money transmission applicants and licensees requiring licensure for persons engaged in activities that meet the definition of both “debt adjustment” and “money transmission” unless exempt. This requirement will be effective on March 1, 2016.

The Department recognizes that some activities such as transmitting bi-weekly mortgage payments to a mortgagee or transmitting unsecured consumer debt payments to a credit are considered “debt adjustment” and “money transmission.” More specifically, the Department is requiring that persons considered to be money transmitters by FinCen—those who receive, on behalf of a debtor, money, or evidences thereof for the purposes of distributing such money or evidences thereof among creditors as payment of the debtor’s obligations—to become licensed as both unless otherwise exempt.

Connecticut law defines “debt adjustment” as an activity “for or with the expectation of a fee, commission or other valuable consideration, receiving, as agent of a debtor, money or evidence thereof for the purpose of distributing such money or evidences thereof among creditors in full or partial payment of obligations of the debtor.” “Money transmission” means “receiving money or monetary value for current or future transmission or the business of transmitting money or monetary value within the United States or to locations outside the United States by any and all means including, but not limited to, payment instrument, wire, facsimile or electronic transfer.”

New Jersey has enacted provisions making it unlawful for any person to prepare a report for use by a mortgage lender in evaluating the capacity of an escrow agent to perform real estate settlement services in return for a fee charged to that escrow agent. "Escrow agent" means an independent person, including an independent bonded escrow company, an independent financial institution whose accounts are insured by a governmental agency or instrumentality, an independent licensed title insurance agent, or an attorney licensed to practice law in New Jersey, who is responsible for the receipt of any written instrument, money, evidence of title to real or personal property, or other thing of value to be held until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered in connection with the transfer of real estate.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.